Impact of Budget 2016-17 on your savings

The Budget season is that part of the year when we all worry about the changes that could affect our savings and our retirement plans. This year, the finance minister has made many proposals that could enable us to save more and improve our financial standing.

Here are some of the crucial ones:

Mixed bag for EPF: Employee Provident Fund (EPF) is perhaps the only form of savings that we are sure to make each year. This is because the EPF amount is invariably deducted from our salaries and our employers almost certainly contribute their share of it. This year’s budget has brought mixed news for EPF. The government has set aside Rs.1000 crore to pay 8.33% interest to all employees for their first three years of service. However, it has made 60% of employee contribution to EPF taxable from the upcoming financial year. As of now, the withdrawal of EPF money after 5 years of continuous service is fully tax exempt. The current exemption will stand if the withdrawn EPF money is used for buying an annuity. So if you have just entered the job market, you are in for better returns on your EPF, as long as you don’t withdraw your money before retirement.

Savings on home buying and renting: If you are looking to buy your first home or move into a rented apartment, this may be the perfect time. Home prices in most parts of the country are at rock bottom and home loan rates have started falling. To add to the sweetness, the finance minister announced an additional tax deduction of Rs.50,000 per annum on home loan interest, for first time home buyers. The only conditions are that the value of the house should not exceed Rs.50 lakh, and the loan taken should not be greater than Rs.35 lakh. For rent payers, the tax deduction limit on home rent allowance (HRA) has been increased from Rs.24,000 to a whopping Rs.60,000 per annum.

NPS and PF savings: The budget has plenty for you to celebrate if are among those who are worried about their retirement savings. From April, a withdrawal of up to 40% of your National Pension Scheme (NPS) corpus, at the time of retirement will be tax exempt. This rule will also apply to superannuation schemes and recognized provident funds (PF) on contributions made from 1 April 2016. In case, the pensioner dies and the fund goes to his/her heir, the amount will be entirely tax-free. Additionally, the tax benefit limit for employers’ contribution to Superannuation Fund and recognized provident funds will now be Rs.1.5 lakh.

Reforms for investment in financial products: For those who like to park their savings in investment products, the budget has little to offer. The financial services industry had a long budget wish-list that included things likes simplification of KYC norms, more Section 80c exemptions, and capital gains tax rationalization. However, the finance minister has only granted the industry a service tax exemption for small mutual fund advisors, and the abolition of capital gains taxation on moving to a different plan under the same mutual fund scheme. So if you were planning to put your savings in a mutual fund or one of the 80c savings instruments (such as ELSS), this budget was not for you.

Bank restructuring: Ultimately, most of what you save will end up in your bank account. So it is important that banks are safe and well capitalized. Indian public sector (PSU) banks are in serious distress because their borrowers have not been repaying their dues. If banks don’t receive what they have lent out, with interest; they can’t pay their depositors’ money. Public sector banks account for over 70% of India’s banking sector. This means that there is a good chance that some of your money is also lying with one of them. To ensure that PSU banks are well capitalized and your money is safe, a stimulus of Rs.25,000 crore has been announced for these banks in the budget.

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